Banks Set for Swaps-Rule Win in Broader Deal to Fund Government

Wall Street is poised to win a big victory in its lobbying campaign against the Dodd-Frank Act as lawmakers move to repeal a derivatives rule as part of a bill to fund the government.

Congress will vote this week on a bill that lets JPMorgan Chase & Co., Citigroup Inc. and other lenders keep swaps trading in units with federal backstops. House and Senate negotiators agreed Tuesday to give the break along with funding increases for the Commodity Futures Trading Commission and Securities and Exchange Commission.

The change, which is included in a broader funding bill, has been criticized by Democratic senators including Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio.

“Middle-class families are still paying a heavy price for the decisions to weaken the financial cops, leaving Wall Street free to load up on risk,” Warren said in a statement.

“Congress should not chip away at important reforms that protect taxpayers and make our economy safer.”

Lawmakers included the swaps provision in Dodd-Frank to protect taxpayers against bank losses after souring derivatives trades spurred a U.S. rescue of the financial industry in 2008. The Federal Reserve and Office of the Comptroller of the Currency provided a two-year delay in 2013 on the condition that banks take steps to move swaps to affiliates that don’t benefit from federal deposit insurance and discount borrowing.

JPMorgan and Citigroup both held 99 percent of their notional-value derivatives trades in insured banking units, according to OCC data from the second quarter.

Agency Budgets

The spending plan agreed to by lawmakers will provide $250 million for the CFTC, up from $215 million, and $1.5 billion for the SEC, an increase of $150 million. The spending measure funds the agencies through Sept. 30, 2015.

The bill was introduced by appropriations committees in the House and Senate and still must be passed by both chambers.

Bank lobbyists have pressured lawmakers for the last four years to do away with the swaps rule, saying it doesn’t reduce risk to the financial system and increases complexity. The House has passed legislation before doing away with the swaps pushout, while the Senate hasn’t voted before on the change.

The industry had already won concessions during the drafting of Dodd-Frank in 2010. Instead of requiring that all derivatives be traded in outside affiliates, the law only pushes out equity, commodity and non-cleared credit swaps.

For the CFTC, the agreement would boost funding for an agency that has warned in recent years that it lacks the budget to adequately enforce new rules for the swaps market.

“The fact is that, without additional resources, our markets cannot be as well supervised; participants cannot be as well protected; market transparency and efficiency cannot be as fully achieved,” CFTC Chairman Timothy Massad said in a Nov. 18 speech.